Saturday, November 19, 2016
That's the answer the new Reserve Bank governor, Dr Philip Lowe, gave in a speech this week. As he explains it, however, it's a detailed story.
Actually, there are two parts to his explanation for our economic success: the first is our good "fundamentals" and the second is our ability to ride out the various "economic shocks" that hit every economy from time to time.
Lowe lists our good fundamentals as including our abundance of natural resources, our well-educated workforce, our "generally favourable demographics" (I think he means our growing population and that our ageing population isn't too aged), our openness to international trade and investment, our links with the fast-growing Asian region, and our demonstrated ability to reform the structure of our economy to boost its productivity.
Lowe adds that the reforms of the 1980s and '90s have given us a more flexible economy, one better able to roll with the punches than it used to be. He nominates three key areas of greater flexibility: our exchange rate, our conduct of monetary policy and our labour market.
Since we allowed our dollar to float in 1983, it has generally moved up or down in response to developments in ways that tend to limit inflation pressure and to stabilise growth.
Since we decided in the mid-1990s to let the central bank - rather than the politicians - make decisions about when to increase or decrease interest rates, as guided by the target of keeping inflation between 2 and 3 per cent on average over the medium term, we've kept the inflation rate reasonably stable and minimised swings in unemployment.
Since we ended the centralised wage-fixing system and moved to collective bargaining at the enterprise level in the first half of the 1990s, we've avoided wage inflation, kept real wages rising in line with improvements in productivity (until recently, anyway) and made employers less inclined to respond to downturns with mass layoffs.
These great areas of flexibility - the floating exchange rate, the independent, target-based approach to monetary policy (interest rates), and enterprise-based wage-fixing - have helped us avoid being derailed by economic shocks.
And it's not as if there's been a shortage of such shocks that could have derailed us, Lowe says.
First, there was the Asian financial crisis of 1997-98, which did derail some of our Asian trading partners. Then there was the bust of the US tech boom - the Tech Wreck of 2001 - then the global financial crisis of 2008-09.
As well, there's the resources boom. With its once-in-a-century surge and then collapse in coal and iron ore prices and consequent surge and falloff in mining construction, the resources boom was a massive, decade-long shock to our economy.
Australia's economic history is littered with commodity booms soon leading to recessions, but not this one (except in Western Australia, thanks to mismanagement by its state government).
But all that's just by way of background. Lowe's main point is to draw attention to the way our possession of certain "buffers" absorbs some of the blow when shocks hit.
We build up and hold these buffers as a kind of insurance policy against the day when trouble arises. Like all insurance policies, they come at a cost. There's a premium to be paid.
So where do you find these buffers? On the balance sheets of banks, governments and households. They're about ensuring your assets exceed your liabilities by a decent safety margin, in case some unexpected problem arises.
In the years leading up to the global financial crisis, our banks maintained higher ratios - of their shareholders' capital to their lending to borrowers - than did banks in America and Europe.
That's why our banks were able to keep lending after the crisis, whereas the others weren't. Their inability to keep lending amplified the original shock.
In the years since then, international authorities have imposed higher levels of capital adequacy and liquidity on the world's banks, including ours.
These greater restrictions make banks safer, but also reduce their profitability. We're still waiting to see how the cost of this insurance premium will be shared between our banks' customers and their shareholders.
At the time of the financial crisis, our government had "positive net debt" - it had more money in the bank than it owed to people holding its bonds.
This made it a lot easier for our government to support the economy by borrowing and spending. Now, Lowe argues, we need to gradually move the budget from deficit back to surplus, rebuilding our fiscal buffer for the next time it's needed.
The total debts of our households have risen to 185 per cent of their annual disposable income. This is a lot higher than for other rich countries, but that's partly because unusual distortions in our tax system encourage borrowing for rental properties to be done by individuals rather than big companies.
More to the point, households have been building up buffers by using mortgage offset and redraw facilities to reduce their net debt by 17 per cent of the gross debt, in the process getting a collective 2½ years ahead of their scheduled repayments.
More than half of all households with mortgage debt, at each level of income, are ahead on their repayments.
If you subtract from our households' debt all the money they hold in currency and bank deposits, the nation's households' net debt falls to about 100 per cent of their annual disposable income.
Our household debt is high, but we've got a fair bit of buffer.